Insurance Segments to Watch in 2013 – Part One: Fracking

While many in the insurance industry were focused on the cyber liability, cargo theft, and weather segments in 2012, this year some insurers are turning their attention to other emerging markets with potential. Carriers and brokers are strategizing over how they can best address three hot topics in particular: healthcare, the fracking segment of the energy market, and reputational risk. These segments aren’t new to the industry, but they do present new exposures.

Some companies are developing products to meet what they consider to be an inevitable demand for coverage options in these three areas. It remains to be seen if others will follow suit, but these segments are here to stay and will create new opportunities – and exposures – for those seizing them.

The energy segment has been popping out alternative and green energy insurance products left and right for some time now. However, most insurers have been avoiding the highly-controversial hydraulic fracturing – or fracking – segment like the plague.

Richard Kerr, CEO of MarketScout in Dallas, says the oil and gas industry has used fracking methods for over 60 years. It has become more prevalent recently because new technology makes the process more efficient and has allowed oil and gas operations to expand into new geographies –like California, Pennsylvania and New York – where fracking wasn’t previously done.

The booming and somewhat controversial fracking method, which faces opposition from some environmentalists and government entities, has also lured some inexperienced people who want to get into this business and make money and that makes insurers very nervous.

“It is a much misunderstood process,” says Kerr. “There are good frackers and bad frackers. You have to have the ability to determine which is which.”

Rick Burns, president of Ryan Specialty Group’s Global Special Risks (GSR) in Houston, says those drilling contractors that do not specialize in fracking may not have the needed technical expertise and thus may present a greater risk than insurers are willing to take on. Disposing of the water that is used during the fracking process could create a hazard, if not done properly, and the insurance industry is challenged with how to cover water disposal companies involved in the process.

There is also a fear of the unknown on the part of insurers.

“The market in general takes a wait-and-see approach to new technologies and industries,” says Burns. “This is extremely new technology. Insurers have said ‘we need to take a look at this and see what we are insuring.’”

Burns says the risk that was covered on the typical oil and gas insurance forms has shifted, and insurers have been hesitant to change their coverage to address the new risks. But he expects carriers will eventually come around.

“The technology is advancing so fast and it’s very expensive technology,” he says. “The insurance community always responds, whether it’s the London market or a domestic market –it’s just the timing on responding.”

Ryan Specialty’s GSR has already responded by offering coverage for energy consultants who work in fracking environments. It offers a package policy with commercial general liability, professional liability, maritime employers liability and umbrella coverage.

GSR is also working on taking its existing well control product and making it more focused and readily available for those independent oil lease operators working with hydraulic fracturing. It plans to launch this product in the next two months.

“Right now, the majority of our focus is doing our best to analyze the risks of hydraulic fracturing and making sure we are creating products that clients want to buy,” says Burns. “We don’t want to keep providing the same coverage we have been with no amendments. It could be that we make a series of small tweaks to coverage or create whole new concepts.”

MarketScout’s Monster Insurance is also launching a fracking insurance program, which it hopes to have completed by July 1. Kerr says Monster is also in the process of writing a white paper on fracking and the insurance industry to help educate the industry on the fracking process. He says given the increasing interest in finding new energy sources, fracking is not going away.

“We are going to hear a whole lot more about fracking; it is very topical in the industry,” says Kerr. “It is the most misunderstood portion of the energy industry today and the most feared segment of the industry today. No one knows what’s going to happen.”

As individual states look at the process and decide which way to go on the matter, advocates will continue to push forward, and Burns says he expects to see more from the insurance industry in response.

“I think there will be many new products coming out in the next two years. People are still learning the technology and people are trying to understand it,” Burns says. “New coverages will crop up and I think existing coverages will be changed to address this industry. The energy insurance industry is a very small community so it’s pretty nimble.”

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Comments

January 29, 2013 at 7:24 pm

wildplacessays:

I beg to differ from some of the generalizations in this article about insuring fracking. First, all environmentalists are opposed to fracking and its inevitable environmental damage, but their approach varies according to philosophy and political strategy. Fracking cannot be done safely, that includes both vertical and horizontal bore fracking that have both been proven dangerous in many ways. Second, the same old players are the ones involved here, not new energy companies. The names have changed, but not the faces. The underwriters are justified in their concerns about a witches brew of fracking waste that cannot be treated by municipal wastewater treatment plants where it is often dumped, and presents serious environmental hazards when used as road de-icer, as is their desire. Overall, thank you for bringing this important issue to our attention!

I beg to differ with the the generalizations that fracking inevitably causes environmental damage and that fracking “cannot” be done safely as it has been done safely for decades in hundreds of locations. Sounds like the rantings of a crazed environmentalist.

If the frackers aren’t going to pay any tax for dnagmiag the lives of ordinary Pennsylvanians, don’t expect me to pay an internet sales tax, even if I have to cart my laptop to nearby Morgantown, WV to make it all legal. Greene County has been unduly burdened by both coal mining and gas extraction, and I sick of it. When are the pollies going to begin representing us? We are the 99%. Precisely what interests Mr. Turzai, besides enriching himself at our expense?

The subject is certainly complex, however, the economies of so many countries may be able to derive so much out of this process. Legislation and new aspects of law, not just US but in many World countries have to find their level of adequacy.

Likewise new facets presented to Energy Underwriters will bring their own inherent problems. Nevertheless, progress will move all this forward and with our past knowledge of US clearance of ex Government sites pollutions), Asbestos, as well as other Products which engendered specific claims……..we should rally round and be able to look after Fracking (shale gas) extractions. Which are not far remote technically to drilling, thus relatively same exposures in material Damages and Liabilities. The implications and ethics being again very similar.
This may be “novelty” for some, yet for others just music played in a different key. If subsequently surveys/claims results show that all aspects of Fracking are negative, then, the ground rules and the laws will help to protect not just the environment but the Insurance Markets around the World. Remember the US is not in isolation on this subject…we are all learning and trying our best to help Clients (from Insurers point of view as well as from Reinsurers – and conforming to the Laws of the various States, country and World legislations.

For those who repeat misinformation, such as “fracking has been done for 60 years” are revealing their ignorance. Since 2005, fracking evolved into hydraulic fracturing at extreme pressure, laced with more toxic chemicals, and in thousands of more locations. Further, when that worn-out rhetoric is followed by “and it has been done safely”, the ignorance is doubled.

A review of the fracking-related events to date and associated health concerns provides insight into the types of pollution exposures that exist and certainly the insurance industry is very aware as they have been paying out:

Poor air quality:
• In 2010, a Texas hospital system located in a heavily drilled area of the state reported asthma rates among young children that were more than three times the state average.

• A study revealed that Fort Worth’s emissions from natural gas processing are equal to that produced by the city’s cars and trucks.

• In 2009, Wyoming failed to meet federal air quality standards for the first time.

• Wyoming’s Sublette County, with a fraction of the population of Houston and Los Angeles, has experienced ozone levels higher than those recorded in those much larger urban areas.

Surface spills:
• One company was fined after it failed to promptly report a 2010 blowout at a Clearfield County, Pennsylvania, well site that spewed natural gas and wastewater for 16 hours.

• A blowout in Leroy, Pennsylvania, released thousands of gallons of chemically laced water into nearby streams.

• Dimock, Pennsylvania, experienced a series of drilling-related incidents, including an 8,000-gallon leak of fracking fluid from faulty supply pipes.

Health effects of natural gas production related chemicals:
• A 2009 study examined the health effects of 61 chemicals used during drilling or fracking in Texas and found that approximately one-fourth of the chemicals could become airborne, affecting the nervous, digestive, circulatory, and immune systems.

• In 2009-2010, the Texas Commission for Environmental Quality found that benzene (a carcinogen), toluene (a solvent harmful to fetal and child development), and carbon disulfide (a potent neurotoxin) were being emitted into the air from natural gas operations. Both the EPA and state agencies have found benzene and toluene in water wells.

I could add a great many more “instances” of fracking problems, conclusively revealing that fracking is not done safely and there have been hundreds of incidents. The insurance industry better be prepared to find themselves in trouble should they not begin assessing the true costs, both human and environmental, fracking poses.